In case (2) the horizontal line, representing exchange value, follows the force of D entirely. The utility of the article is very great, but the value is only limited by the difficulty of obtaining it. So far as U is concerned, exchange value can go up a great distance, but will go no higher than the point where the article can be [pg 254] obtained. The dotted lines underneath the horizontal line indicate that the exchange value of articles in this class tend to fall in value.
(3.) There is a third case, intermediate between the two preceding, and rather more complex, which I shall at present merely indicate, but the importance of which in political economy is extremely great. There are commodities which can be multiplied to an indefinite extent by labor and expenditure, but not by a fixed amount of labor and expenditure. Only a limited quantity can be produced at a given cost; if more is wanted, it must be produced at a greater cost. To this class, as has been often repeated, agricultural produce belongs, and generally all the rude produce of the earth; and this peculiarity is a source of very important consequences; one of which is the necessity of a limit to population; and another, the payment of rent.
In case (3) articles like agricultural produce have a very great power to satisfy desires, and if scarce would have a high value. So far as U is concerned, here also, as in case (2), exchange value might mount upward to almost any height, but it can go no higher than D permits. In commodities of this class, affected by the law of diminishing returns, the tendency is for D to increase, and so for exchange value to rise, as indicated by the dotted lines above that of the exchange value.
§ 3. Commodities limited in Quantity by the law of Demand and Supply: General working of this Law.
These being the three classes, in one or other of which all things that are bought and sold must take their place, we shall consider them in their order. And first, of things absolutely limited in quantity, such as ancient sculptures or pictures.
Of such things it is commonly said that their value depends on their scarcity; others say that the value depends on the demand and supply. But this statement requires much explanation. The supply of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the demand? Not the mere desire for the commodity. A beggar [pg 255] may desire a diamond; but his desire, however great, will have no influence on the price. Writers have therefore given a more limited sense to demand, and have defined it, the wish to possess, combined with the power of purchasing.[207] To distinguish demand in this technical sense from the demand which is synonymous with desire, they call the former effectual demand.
General supply consists in the commodities offered in exchange for other commodities; general demand likewise, if no money exists, consists in the commodities offered as purchasing power in exchange for other commodities. That is, one can not increase the demand for certain things without increasing the supply of some articles which will be received in exchange for the desired commodities. Demand is based upon the production of articles having exchange value, in its economic sense; and the measure of this demand is necessarily the quantity of commodities offered in exchange for the desired goods. General demand and supply are thus reciprocal to each other. But as soon as money, or general purchasing power, is introduced, Mr. Cairnes[208] defines “demand as the desire for commodities or services, seeking its end by an offer of general purchasing power; and supply, as the desire for general purchasing power, seeking its end by an offer of specific commodities or services.” But many persons find a difficulty because they insist upon separating the idea of supply from that of demand, owing to the fact that producers seem to be a distinct class in the community, different from consumers. That they are in reality the same persons can be easily explained by the following statement: “A certain number of people, A, B, C, D, E, F, etc., are engaged in industrial occupations—A produces for B, C, D, E, F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In each case the producer and the consumers are distinct, and hence, by a very natural fallacy, it is concluded that the whole body of consumers is distinct from the whole body of producers, whereas they consist of precisely the same persons.”